GROSS DOMESTIC PRODUCT: Vital Concepts about GDP

The term "Gross Domestic Product" refers to the total monetary value of all final goods and services produced (and sold on the market) within a country over a given time period (typically 1 year).

The gross domestic product (GDP) is the most widely used indicator of economic activity.

At the end of the 18th century, the first basic concept of GDP was developed. The modern concept was developed by American economist Simon Kuznets in 1934 and adopted as the primary indicator of a country's economy at the 1944 Bretton Woods Conference.

What does the term "Gross" mean?

The term "gross" (as in "Gross Domestic Product") denotes that goods are counted regardless of how they are used. A product can be consumed, invested in, or used to replace an asset. In every case, the final "sales receipt" for the product will be added to the total GDP figure.

"Net," on the other hand, does not take into account products used to replace an asset (in order to offset depreciation). The term "net" only refers to products that are intended for consumption or investment.

What does"Domestic" stand for? (GDP vs. GNP and GNI)

Household (GDP)

The term "domestic" (as in "Gross Domestic Product") denotes a geographical inclusion criterion: goods and services counted are those produced within the country's borders, regardless of the producer's nationality. The output of a German-owned factory in the United States, for example, will be counted as part of the country's GDP.

Gross National Product (GNP)

"National" (in "Gross National Product"), on the other hand, indicates that the inclusion criterion is based on citizenship (nationality): goods and services are counted when produced by a country's national, regardless of where the production takes place physically. In this case, the output of a German-owned factory in the United States will be counted both as part of Germany's GNP and as part of the United States' GDP.

GNI

Because both are based on nationality rather than geography, GNI (Gross National Income) is a metric similar to GNP. The difference is that GNI uses the income approach to calculate total value, whereas GNP uses the production approach to calculate GDP. Theoretically, GNP and GNI should produce the same result.

What does the term "Product" mean?

The term "product" (as in "Gross Domestic Product") refers to the final goods and services that are sold on the market.